After reading the first part of this three-part series, you now have a basic understanding of why a lifetime gift may reduce an estate’s federal income tax liabilities. Now, I will cover how you can further reduce your estate’s tax liabilities. The Internal Revenue Service (IRS) gives each donor (gift giver) a tax exemption of $13,000 annually for a lifetime gift made to each donee (gift recipient). However, the IRS allows spouses to make gifts together and add their exclusions together. In other words, if you are married, you and your spouse can make an annual gift of up to $26,000 to each donee by combining your annual gift exclusion. Thus, if you have three children, you and your spouse can give each of your children up to $26,000 without triggering federal gift taxes for gifts made on or after Jan. 1, 2009. You can see how this will have the effect of reducing your income tax liabilities imposed on your estate after you die. Furthermore, your children may benefit more from a current gift than they would a future gift.
According to the IRS, donors are typically responsible for paying federal gift taxes. Thus, if you gave someone a gift that exceeded the amount of the annual gift tax exclusion, the person receiving the gift is not responsible for paying the income taxes on the value of his gift. Instead, you are responsible for paying the income taxes absent a special written agreement between you and the recipient.
This blog is part 2 of 3 on how Federal Gift Taxes cab reduce an estate’s tax liability. Tune in to our blog tomorrow to read Part 3.